Homework SourseMaxwell Company manufactures and sells a single product Pric
Maxwell Company manufactures and sells a single product. Price and cost data regarding Maxwell’s product and operations for fiscal year 2016 are as follows (presented under absorption or full costing):
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Revenue (120,000 units) $3,000,000
Less: Cost of sales
Direct materials $1,320,000
Directed Labor 600,000
Variable manufacturing overhead 300,000
Fixed manufacturing overhead 192,000 2,412,000
Gross margin $588,000
Less: Variable selling expenses $156,000
Fixed selling and administrative expenses 276,000 432,000
Net income $156,000
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a. Compute the number of units required to be produced and sold in order to earn direct costing profits of $260,000 in 2017; you may assume that in 2017, fixed costs, as well as per unit variable cost and (per unit) selling prices are the same as for fiscal year 2016.
b. Answer this question independently of part (a) above. Now suppose that Maxwell’s management believes that direct labor costs will increase by 8 percent in fiscal year 2017, but all other variable costs per unit, fixed costs, and selling prices will remain as in 2016. Compute the breakeven point in units for 2017 based on these assumptions.
Solution
Answers
Amount
Units
per unit
Revenues
$ 30,00,000.00
120000
$ 25.00
Less: Variable Cost
Direct material
$ 13,20,000.00
120000
$ 11.00
Direct labor
$ 6,00,000.00
120000
$ 5.00
Variable manufacturing Overhead
$ 3,00,000.00
120000
$ 2.50
Variable selling expenses
$ 1,56,000.00
120000
$ 1.30
Total variable cost
$ 23,76,000.00
120000
$ 19.80
Contribution margin
$ 6,24,000.00
120000
$ 5.20
Less: Fixed Costs
Fixed manufacturing overhead
$ 1,92,000.00
Fixed selling & administrative overhead
$ 2,76,000.00
Total Fixed cost
$ 4,68,000.00
Net Income
$ 1,56,000.00
A
Desired Net Income
$ 2,60,000.00
B
Total Fixed Cost
$ 4,68,000.00
C=A+B
Total contribution margin desired
$ 7,28,000.00
D
Unit Contribution margin
$ 5.20
E = C/D
No. of unit s to be produced and sold to earn desired profits
140,000 units
Answer = 140,000 unit
New Labor cost will be $5 + 8% = $ 5.4 (increased by $ 0.4)
Hence, new unit contribution margin will be old unit contribution – 0.4 = $ 5.2 - $0.4 = $ 4.8
A
Desired Net Income
$ 2,60,000.00
B
Total Fixed Cost
$ 4,68,000.00
C=A+B
Total contribution margin desired
$ 7,28,000.00
D
Unit Contribution margin
$ 4.80
E = C/D
No. of unit s to be produced and sold to earn desired profits
151,667 units
Answer = 151,667 units.
| Amount | Units | per unit | |
| Revenues | $ 30,00,000.00 | 120000 | $ 25.00 |
| Less: Variable Cost | |||
| Direct material | $ 13,20,000.00 | 120000 | $ 11.00 |
| Direct labor | $ 6,00,000.00 | 120000 | $ 5.00 |
| Variable manufacturing Overhead | $ 3,00,000.00 | 120000 | $ 2.50 |
| Variable selling expenses | $ 1,56,000.00 | 120000 | $ 1.30 |
| Total variable cost | $ 23,76,000.00 | 120000 | $ 19.80 |
| Contribution margin | $ 6,24,000.00 | 120000 | $ 5.20 |
| Less: Fixed Costs | |||
| Fixed manufacturing overhead | $ 1,92,000.00 | ||
| Fixed selling & administrative overhead | $ 2,76,000.00 | ||
| Total Fixed cost | $ 4,68,000.00 | ||
| Net Income | $ 1,56,000.00 |
